What should be included in a term sheet?
Table of Contents
- 1 What should be included in a term sheet?
- 2 Does term sheet come before due diligence?
- 3 How do you due diligence an investor?
- 4 How does an anti-dilution clause affect ownership in a down round?
- 5 What are the documents required for startup investment due diligence?
- 6 Should investors skip on due diligence?
- 7 What is the scope of investment due diligence?
What should be included in a term sheet?
But no matter who the investor is, a term sheet will always contain six key components, including:
- A valuation. An estimate of what a company is worth as an investment opportunity.
- Securities being issued.
- Board rights.
- Investor protections.
- Dealing with shares.
- Miscellaneous provisions.
Does term sheet come before due diligence?
Term Sheets are non-binding because the investor will usually need to first conduct more due diligence investigations into the company. These include inquiries into, for example, the company’s corporate documentation, tax returns, financial statements, and intellectual property.
Why do investors insist on having an anti dilution clause in term sheets?
To mitigate lower future valuations, investors can insert anti-dilution clauses that act to readjust their ownership stake to avoid receiving too hard a hit.
How do you due diligence an investor?
How to do due diligence on investors
- Have a look at the team. What does the investment team look like?
- Ask for an anti-reference.
- Ask to be introduced to founders they have worked with before.
- Dig out your own references.
- Good things to ask.
- Know what you are looking for, and make a holistic judgement.
How does an anti-dilution clause affect ownership in a down round?
Anti-dilution provisions protect an investor’s equity stake from dilution. Therefore, the investor’s percentage ownership in the company will decrease. In some cases, the cash that a company receives for shares may offset the effect. However, usually, there will be a decline in the value of the outstanding shares.
Who creates a term sheet?
These are also considered to be the first step of any form of transaction between the two parties involved. A term sheet is provided by the investor for the founder of the company to look over and read through.
What are the documents required for startup investment due diligence?
Startup Investment Due Diligence Checklist 1 Basic Company Documents and History. 2 Securities Matters. 3 Insiders. 4 Documents Relating to Indebtedness. 5 Contracts and Commitments. 6 Litigation and Claims. 7 Tangible Properties. 8 Intangible Properties.
Should investors skip on due diligence?
Investments are inherently risky, but the awareness of risk should not be an excuse for skipping on a due diligence investigation. As Theranos investors found at their own cost, it meant jumping into an incredibly complex industry such as Biotech, with their eyes closed.
Does your startup need investor support?
If you decide your startup requires investor support, be prepared for an intensive due diligence process and have any and all expected documentation ready and well organized. A startups lack of knowledge of what is expected of the due diligence process or being ill prepared can turn off potential investors.
What is the scope of investment due diligence?
Investment due diligence, as discussed here, still covers a wide range of investors and investing scenarios, including startup and VC funding, M&A, debt finance, and long-term supply contracts. The nature and scope of the due diligence can vary significantly depending on the scenario.